Treasuries drop as U.S. unemployment rate unexpectedly falls

Treasuries fell for a second day as a report showed the U.S. unemployment rate unexpectedly declined last month, boosting speculation that stimulus from the Federal Reserve will accelerate the labor recovery and damping refuge demand.

The yield on the 10-year note rose to the highest level in a week as a report showed the U.S. added 114,000 jobs in September, compared with a revised 142,000 gain the previous month. The benchmark security broke a four-day rally yesterday after minutes of the Fed’s last meeting showed policy makers saw manageable risks in a third round of U.S. bond buying.

“The reaction is about the unemployment rate declining -- household employment moved up an awful lot, and you had revisions in the prior month’s payrolls,” Christopher Sullivan, who oversees $2 billion as chief investment officer at United Nations Federal Credit Union in New York. “It’s a piece of more optimistic data.”

The yield on 10-year notes rose five basis points, or 0.05 percentage point, to 1.73 percent at 9:06 a.m. New York time, according to Bloomberg Bond Trader data, the highest since Sept. 25. The 1.625 percent security due August 2022 slipped 13/32, or $4.06 per $1,000 face amount, to 99 3/32. Thirty-year bond yields rose six basis points to 2.95 percent.

The unemployment rate fell to 7.8 percent in September, the lowest since January 2009, as employers took on more part-time workers. The rate, which dropped from 8.1 percent, was forecast to rise to 8.2 percent, according to the median estimate of 88 economists surveyed by Bloomberg. The median estimate for job gains was 115,000, according to another survey.

Lost ‘Luster’

“People are looking at the rate more than anything else,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of the 21 primary dealers that trade with the Fed. “They are saying it’s not as bad as they originally thought. It’s taken some luster out of the marketplace.”

The payrolls data comes a month before the U.S. presidential election. Employment and the economy are central themes in the campaign, with President Barack Obama and Republican challenger Mitt Romney each trying to convince voters they can best energize the expansion and create jobs. The jobless rate has stayed above 8 percent since February 2009.

While reducing borrowing costs, the Fed hasn’t made steady progress toward meeting its mandate to achieve full employment.